In late January the Economics Minister from Switzerland, Joseph Deiss, told reporters that ministers from 25 countries met at the World Economic Forum in Davos and agreed to step up the pace of the Doha Round trade talks so an agreement could be reached in 2006. The World Trade Organization (WTO) has already set a full ministerial meeting of all member countries for December 2005 in Hong Kong. Freer trade in agriculture was one of the five areas mentioned by Mr. Deiss as being critical to the success of the negotiations.
In late July of last year WTO negotiators agreed that the agricultural trade talks would center on three subjects: export subsidies, domestic supports and market access. Mr. Deiss said that the meeting at Davos “was the kick start to the political process necessary to put negotiations on the right track.” But, what is that “right track” and where is it headed?
The Uruguay Round agreement of 1994 was the first one to seriously address trade protectionism in agriculture. Previous agreements made significant progress in reducing tariffs on raw materials and manufactured products, but most agricultural issues were dealt with only if they could be done easily. For example, the EU agreed to a bound zero tariff on soybeans in earlier negotiations only because it produced virtually no soybeans and could agree to the U.S. position without suffering any immediate pain. The average bound agricultural tariff remains at a relatively high 62 percent. The Uruguay round agreement on agriculture was designed to be a down payment on further moves toward freer agricultural trade to be achieved in the next round of negotiations.
Two factors make the agricultural issues significantly different from issues in manufactured products. First, the changes in tariffs in manufactured products began in the late 1940s when almost every government official from a major country recognized that the high tariffs of the late 1920s and 1930s were one of the causes of economic stagnation in the 1930s. Once trade liberalization in manufactured products began, the successes were large enough so that the winners had an interest in keeping the process going. While there were many struggles over specific tariff changes, like those for steel and textiles, and many tradeoffs among countries, the process kept moving forward because economic gains were apparent.
As noted earlier, agriculture did not have significant trade reforms until the mid-1990s. By then, the economic distresses of the 1930s were a distant memory. The developed country economies had greatly expanded as a result of the freer trade in manufactured products. Their governments could afford to support production agriculture and consumer incomes were high enough so that higher food prices caused by protectionism were bearable. Estimates made during the Uruguay Round showed that Japanese food prices could be up to one-third lower if all trade barriers on food were removed.
The second factor is the special place that agriculture has managed to secure within the societies of many countries. In some countries the issue is framed as food security. In others it is more of a historical link to farming and ranching and wanting to keep land in agriculture. Some countries see the large subsidies paid to agricultural producers by other governments and argue that their farmers cannot compete with the treasuries of other countries. Virtually every government has some agriculture to protect and can justify a reason to do so.
What is usually left out of the discussion on free trade for agriculture is that every government also represents consumers who should to be allowed to enjoy the benefits of lower food prices and a wider range of products through international trade. Agricultural trade negotiations should start with consumers because the purpose of production is consumption. If governments want to keep land from moving out of agriculture or pursue other public policy goals that should be done separate from trade policy. That is why governments in the 1970s began moving toward cash payments and away from trade barriers as a way to support farm incomes.
Developing country governments that are relatively new to trade negotiations are often too quick to follow the trade protectionism of developed countries even though their consumers have much lower incomes and cannot afford the high food prices created by trade protectionism. They have been content to just criticize the payments made to farmers in developed countries without recognizing that their own consumers are hurt by high tariffs on agricultural products.
The stalemate in the agricultural talks can only be broken by governments recognizing that freer trade is about improving the standard of living of consumers by lowering barriers to trade. Mr. Diess’ own country of Switzerland is one of the countries that protects agriculture with high tariffs at the expense of consumers. Japan follows a similar path.
An established pattern in trade negotiation is for every country to make significant contributions to the new consensus. If countries truly represented consumers, they could reduce their import barriers and then argue that countries where producers rely disproportionately on exports subsidies, import restrictions and domestic payments are obligated to offer their own set of reductions in trade distorting policies. That could then lead to meaningful negotiations with positive outcomes for all countries.